18 April 2002 Internal T.I. 2002-0133797 - ECP CAPITAL GAINS ELECTION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the subparagraph 40(1)(a)(iii) capital gains reserve applies to dispositions of eligible capital property in respect of which an election has been filed pursuant to subsection 14(1.01) of the Act.

Position: Yes.

Reasons: Subsection 14(2) of the Act deems all of the proceeds of disposition to have become payable to the taxpayer at the time the election is made. However, this deeming provision is only for the purposes of section 14 of the Act.

		April 18, 2002

	Edmonton Tax Services Office	HEADQUARTERS
	Client Service Division	A. Seidel, CMA
(613) 957-2058
	Attention: Arlene J. Morin
		2002-013379

Eligible Capital Property Capital Gains Election

This is in reply to your letter, sent by facsimile on February 7, 2002, and further to our telephone conversation of April 16, 2002 (Seidel/Morin) concerning the deductibility of a reserve pursuant to subparagraph 40(1)(a)(iii) of the Income Tax Act (the "Act") in the situation where a taxpayer has made an election in respect of the disposition of eligible capital property, within the meaning thereof in section 54 of the Act, pursuant to subsection 14(1.01) of the Act.

As discussed in our telephone conversation, this response replaces our response of March 15, 2002. This response reflects our Directorate's discussions with the Department of Finance, confirms the comments in file 2001-009151 and specifically addresses the application of subsection 14(2) of the Act in the situation where an election is made by a taxpayer pursuant to subsection 14(1.01) of the Act.

Subsection 40(1) of the Act generally permits a taxpayer to defer a portion of the gain attributable to a "disposition" of property where any portion of the "proceeds of disposition" is not payable to the taxpayer until after the end of the year in which the disposition occurred. "Disposition" is defined in subsection 248(1) of the Act and "proceeds of disposition" is defined in section 54 of the Act. Subsection 40(1) of the Act is subject to any provision "otherwise expressly provided" in Part I of the Act.

Subparagraph 39(1)(a)(i) of the Act provides that a gain in respect of the disposition of an eligible capital property does not give rise, for the purposes of the Act, to a capital gain.

Subsection 14(1) of the Act provides that where, at the end of a taxation year, the amounts required to be deducted from a taxpayer's cumulative eligible capital, within the meaning thereof in subsection 14(5) of the Act, in respect of a business exceed the amounts required to be added to the taxpayer's cumulative eligible capital, the negative balance, if any, is required to be included in the taxpayer's income for the year from that business. Pursuant to "E" of the definition of cumulative eligible capital, any amount that a taxpayer may become entitled to receive in respect of the disposition of an eligible capital property reduces the amount of a taxpayer's cumulative eligible capital. This provision overrides subsection 40(1) of the Act and effectively defers the income inclusion of any gain in respect of the disposition of an eligible capital property until such time as there is a negative balance in the cumulative eligible capital of a taxpayer.

Notwithstanding subsection 14(1) of the Act, subsection 14(1.01) of the Act was enacted for dispositions of eligible capital property that occur in taxation years that end after February 27, 2000. Subsection 14(1.01) of the Act provides that a taxpayer may elect to treat the disposition of certain eligible capital property as a disposition of a capital property. Subsection 40(1) of the Act would therefore be applicable to such a disposition of capital property.

Subsection 14(2) of the Act provides that, "where any amount is, by any provision of the Act, deemed to be a taxpayer's proceeds of disposition of any property disposed of by the taxpayer at any time, for the purposes of this section" (section 14 of the Act), such proceeds of disposition are deemed to have become payable to the taxpayer at the time of the disposition. However, this deeming provision is only applicable to section 14 of the Act. Accordingly, for purposes of subparagraph 40(1)(a)(iii) of the Act, whether or not there is an "amount that is payable to the taxpayer after the end of the year" in which the disposition of the eligible capital property occurred is a question of fact which will have to be determined at the time of the disposition. Where it is determined that an amount is payable to the taxpayer after the end of the year in which an eligible capital property was disposed of, and to which subsection 14(1.01) of the Act applied, the taxpayer would be entitled to claim a deduction in that year pursuant to subparagraph 40(1)(a)(iii) of the Act.

We hope that our comments are of assistance. If you wish to discuss any of the above further, please contact the writer.

John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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